Canada: Employers: Be Proactive And Plan For The Ontario Retirement Pension Plan

As early as January 2017, employers and employees may be subject
to the new Ontario Retirement Pension Plan ("ORPP"). The
ORPP will be a provincially-managed pension plan in which mandatory
employee contributions through payroll deductions will be matched
by employers. All employees in Ontario, excluding those employed in
federally-regulated sectors and members of comparable workplace
pension plans, must be members of the ORPP. The Ontario government
wants to include the self-employed in the ORPP. This is currently
prohibited by the federal Income Tax Act.

Framework of the ORPP

The stated goal of the ORPP is to ensure that every employee in
Ontario will be part of either the ORPP or a comparable workplace
pension plan by the year 2020. The ORPP is being designed to
augment the existing pillars of retirement savings arrangements of
employees: the Canada Pension Plan, workplace pension plans and
personal savings. The benefits paid out by the ORPP to retired
members will vary based on their years of participation, total
contributions and salary while in the plan. The ORPP contributions
will be held in trust and will not form part of general government
revenues. The administrative costs of the ORPP will be borne by the
plan, not by taxpayers. The ORPP is to be administered and invested
by an independent and professional Board of Directors and will be
subject to a legislative review within 10 years.

Operation of the ORPP: Enrollment and Contribution
Schedule

ORPP contribution rates are to be phased in from the time of an
employer's scheduled enrollment. The first year contribution
rate for employees and employers is to be 0.8% of annual earnings.
Second year rates are to be 1.6% of earnings. For years three and
following, employer and employee contributions will be fixed at the
top rate of 1.9% of annual earnings up to $90,000.

Employers with a registered workplace pension plan in place or
in the process of registration as of August 11, 2015, will be
permitted to defer ORPP enrollment until "Wave 4" in
2020.

The first wave of enrollment in the ORPP will require large
employers with 500 or more employees who are without registered
workplace pension plans to contribute to the ORPP commencing
January 1, 2017.

The second wave provides that employers with between 50 and 499
employees who are without registered workplace pension plans will
begin contributing to the ORPP commencing January 1, 2018.

The third wave of enrollment in the ORPP requires small
employers with 50 or fewer employees without workplace pension
plans to contribute commencing January 1, 2019.

The fourth wave will require employers with a workplace pension
plan as of August 11, 2015, that is not modified to meet the
criteria of a comparable workplace pension plan to contribute to
the ORPP on January 1, 2020.

Exemptions from the ORPP

Participation in a "comparable" workplace pension plan
will exempt employees and employers from enrollment in the
ORPP.

1. Comparable Pension Plans

The Ontario government has described a "comparable
plan" as a registered pension plan subject to federal and
provincial government regulation that:

provides participants with a
predictable stream of income for life;

provides some security that
participants won't outlive their savings;

requires contributions from employers
to ensure fairness; and

aims to replace up to 15% of
pre-retirement income.

In a technical bulletin published on August 11, 2015, (the
"Technical Bulletin") Ontario outlined the minimum
thresholds for comparable pension plans of different types.

a) Defined Benefit Pension Plans

In a defined benefit ("DB") plan, a member is entitled
to a set retirement income that is paid for life based on a
predetermined formula. Factors taken into account by the formula
include salary, length of employment, and years of service. DB
plans can be funded wholly by the employer or by contributions from
both the employer and plan members. To be considered a comparable
pension plan, a DB plan must match or exceed the benefits being
offered to employees through the ORPP.

The Technical Bulletin establishes the minimum comparability
threshold for DB plans to be an annual benefit accrual rate of at
least 0.5% of earnings. The accrual rate is the rate at which an
employee builds up retirement income in a pension plan over time.
The accrual rate is multiplied by the employee's earnings to
calculate how much pension the employee will eventually be entitled
to under the DB plan.

b) Defined Contribution Pension Plans

Under a Defined Contribution ("DC") plan, a fixed
amount of money is paid into an account for the benefit of the
employee. Contributions can be made solely by the employer or by
both the employer and the employee. The retirement income of the
employee is dependent upon the accumulated value, at retirement, of
contributions and investment returns in the employee's
account.

To meet the criteria of a comparable workplace pension plan
published in the Technical Bulletin, a DC plan must have a minimum
annual total contribution of 8% of base salary earnings and
employers are required to contribute at least 50% of the total
contribution. Recognition of DC plans as "comparable"
represents a shift from the original government proposition that
only DB plans would be considered comparable.

c) Pooled Registered Pension Plans

Pooled Registered Pension Plans ("PRPPs") were
recognized in Ontario earlier this year with the passage of
enabling legislation. The Technical Bulletin discloses that the
government continues to consult with pension experts with the
objective of establishing a comparability threshold for PRPPs.

d) Other retirement savings plans

Group Registered Retirement Savings Plans ("GRRSPs")
and Deferred Profit Sharing Plans ("DPSPs"), while they
are similar in structure to DC plans, are not considered comparable
pension plans under the ORPP.

Takeaway for Employers

Employers have a window of opportunity to review and
strategically tailor their retirement pension plan to their broader
business plan before the deadline for enrolment in the ORPP.
Employers in Ontario should assess their chosen retirement income
plans to determine whether they qualify as an exempted comparable
workplace pension plan under the ORPP. Employers should also then
consider whether, from a business perspective, it is advantageous
for them to modify their existing pension plans or implement a
comparable workplace pension plan rather than contribute to the
ORPP. Modifications must be made prior to the deadline for amending
existing pension plans on January 1, 2020, and implementations must
be completed before the employer's scheduled entrance into the
ORPP. Legal advice can be especially helpful for employers seeking
to make sound changes to existing retirement pension plans while
navigating the resulting pensions, collective bargaining and
employment concerns. Employers should take note that by proactively
implementing a strategy with respect to pension planning under this
new regime, an employer's retirement pension plan can further
their long term business strategy.

The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.

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